The money market is getting more serious and difficult in USA. The New York Times issue of November 29, 2007 carried a 2 page article on the subject. Unfortunately, the Federal Reserve and other economists do not want to acknowledge that a recession is on the way, as it will set off a panic in the stock markets and businesses all around the world. But this is exhibiting the 'Ostrich Syndrome'. Let it be clear the US market is heading for a recession. In our article titled 'What is a business cycle' we had clearly expostulated about recession and it needs no repetition. However, the reason as to why the recession has occurred again is due to entirely different reasons which we will highlight below.
Recession occurs when the businesses are not financed from the savings of people. This is the normal case but this time it is not due to that alone. The recessions in the past occurred because many invested in businesses that the consumers did not underwrite with their own money. This recession is due to bad lending in the mortgage markets, speculation and imprudent lending policies by most financial institutions and banks. Because of the amounts involved are very large, the banks and other lenders do not have enough money to lend. They have become more cautious. In the past anybody could walk in and get a loan. Now it is not so. When money is easily available, very few realize its value and importance.
But all businesses need money to borrow. A business cannot grow without borrowing money. Big businesses do not suffer much because they have the capacity to borrow, offer collateral and lending institutions know their past track record. It is the SMEs which will suffer maximum. Banks will tighten their norms. Even if the interest rate is high, the banks would not be interested because you do not have collateral. In any case the real estate what you have will be undervalued by them and you would have put everything on the table. The same banks would have wooed you when they were flush with funds. If you are a SME, then don't trust your banker. He will come to you only when they want your business. When you need them, they will look away. Bankers and Money Lenders are the biggest leeches in the world and no wonder Islam considers it as 'haraam'. They always adopt a win/lose position. This is a fundamental aspect of life everyone should know. Since 90% are SMEs in USA, this will lead to unemployment and lack of expansion by them because money is not available.
I am unable to understand the Federal Reserves policies. This is not the time to cut interest rates. Another aspect which surprises me is the reaction of stock markets. Just rumors of interest cut, sets its index soaring. This means speculators are at work. Some innocent investor is going to pay with his hard earned money. Don't say nobody warned you if you find yourself in that position later.
© Copyright, Nov 29-07 . www.madgopes.com . Without prejudice. All rights reserved
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Madhavan T Gopalachary
(Visit Madhavan's Website)
Madhavan Gopalachary, nick name "madgopes"
(g pronounced as in go) given by IIT
classmates, is a Mechanical Engineer and
an alumnus of Indian Institute of
Technology, Madras having passed out
specializing in IC Engines &
Thermodynamics.
He has nearly 35 years of experience in
the Corporate World. He started off as a
trainee and handled sales, marketing,
manufacturing, product management, profit
center management, strategic planning and
corporate development including R & D in
various organizations and at various
levels before becoming a CEO. His last two
professional assignments were at CEO level
before embarking to start management
consultancy business on January 01, 1998.
He has worked for British, Swedish MNCs as
well as very large Indian business houses.
He has spent a large portion of his time
from June 1998 till date in East African
Countries practicing as an independent
Management Consultant.
More details can be obtained at the
following web sites:
mmg.name/
mtg.html
mmgconsu
lting.biz/
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